Despite the slowdown in income and jobs, high rising interest rates and the overall economic uncertainty,

prices of residential property did not fall. Find out why realty prices remained unchanged. And what you should do if you want to buy or sell a house now.

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The Economic Times Wealth, January 16-22, 2012

Cover Story

High inflation, rising interest rates, waning job growth and lacklustre stock markets ... residential property prices in most cities have remained unaffected by the spate of bad news. Heres why property prices didnt fall and what you should do if you want to buy now.
RAJ

AMIT SHANBAUG & SAKINA BABWANI he last time Bharat Sharma went looking for a house that fit his budget of `40 lakh was in January 2011. Prices were high then and so were interest rates. The same month, he came across reports about a possible correction in property prices in the next one year. The arguments were compelling. Property prices and interest rates were high, making EMIs unaffordable. Income growth had slowed down, job creation was on the wane, inflation was high and there was oversupply in the

market. With everything pointing Continuing investor interest to property prices coming down, Investors are the lifeline of a cashSharma decided to wait. He is now strapped developer. They are the back in the market looking for a ones who are keeping builders property, with a slightly higher afloat even now. Pankaj Kapoor, budget (`42 lakh). But managing director of real contrary to his estate research firm Liases expectations, prices Foras, explains that Customise have not gone down. In compared to 1995, when your tax fact, they have risen. there was shortage of planning Page 15 The project that I was liquidity in the market considering is now sold which led to a crash in out and the others the real estate sector, the launched recently in the situation now is quite same locality are quoting at different. There are hardly higher prices, he says. Why did any avenues which offer you safe property prices defy what the returns today. The stock markets market pundits were expecting? are volatile and gold prices are also What prevented them from falling? at an all-time high. So, investors

look at the real estate sector to park their excess funds. It is not the developers who would have to take a price cut but the investors, he adds. According to Kapoor, it is the investors who are instrumental in the property prices staying firm. Besides this, there are a lot of venture capital firms which have bought huge stakes in realty projects. For the developers, it is a win-win situation. Since they have already cut down on their losses, they wont be losing much even if the rates come down a bit, he adds. However, in some cases it is also because of these investors that the builders cannot reduce prices

Cover Story
NO SIGNIFICANT CORRECTION IN 2011
Despite the buzz about a correction, prices have not gone down significantly in most locations.
City District Malleshwaram, Rajajinagar Velachery Banjara Hills Bandra (W), Khar (W), Santacruz (W), Juhu Defence Colony, Gulmohar Park, Hauz Khas Enclave, Safdarjung Development Area, Panchsheel Park Koregoan Park, Bundh Garden Ballygunge, Queens Park, Rainy Park, Gurusday Road June 2008 4,500 - 6,000 3,800-4,200 6,500 28,000-32,000 June 2009 3,900 - 5,400 3,800-4,000 5,800 20,000 - 24,000 June 2010 3,800 - 5,400 3,500-5,000 6,500 24,000-31,000 June 2011 4,300-6,200 3,500-5,300 6,850 24,000-32,000

The Economic Times Wealth, January 16-22, 2012

03

COST OF CONSTRUCTION
Heres how the cost components of a housing project stack up.

Bangalore Chennai Hyderabad Mumbai Delhi NCR

18%
Fittings

UP

24,000-25,000

20,000-23,000

24,000-32,000

27,000-40,000

30%
Labour
9,000-13,000 10,000-17,000

UP

Pune Kolkata

7,000-12,000 8,500-10,000

6,000-9,000 8,300-9,500

6,750-10,500 9,500-11,500

25% 50%
The average increase in the cost of construction in the past one year.

*Prices in ` per sq ft. Source: Cushman & Wakefield

20

Raw material cost inflation

Year-on-year % change in WPI

Bricks & tiles

15

Stone
10

Grey cement

{
Dec 2011

Construction material

UP

2%
Approvals

Stainless steel & alloys

-5 Aug 2011

substantially. A big investor who puts in money at the pre-launch stage of the project is also looking to exit at a higher rate later, says a Gurgaon-based real estate broker. If the developer reduces the ticket price, the investor will not be able to sell his properties in the market and, therefore, will not invest in the builders projects in future, he says.

Restricted supply
One of the main reasons for residential

THE DEMAND IS STILL THERE

Despite the slowdown in sales, the demand for real estate still continues to be strong.
Mumbai Pune Hyderabad Kolkata NCR Chennai Bangalore 0 200 400 600 800 Gap Demand Supply

Housing units (in thousand) Source: Cushman & Wakefield Research

property prices correcting only marginally in some locations or not at all in most, was the restricted supply of new projects. According to real estate consultancy firm Knight Frank, the pace of new project launches was severely crippled in 2011. During 2010, roughly 3.61 lakh residential units were launched across the top seven cities of Mumbai, Delhi NCR, Pune, Kolkata, Bangalore, Chennai and Hyderabad. However, only 1.72 lakh units came up in 2011, a decline of 52% over the previous year. The decline in new launches was sharper in certain locations, such as Mumbai, where prices were high and buyers few. For instance, just about 19,470 units were launched in Mumbai in 2011 compared with the 54,968 housing units built in the previous year. While fewer new launches were one reason for the restriction in supply, project delays also played an important role. The situation is likely to continue for some more time. According to property research firm PropEquity, nearly half of the 9.3 lakh under-construction residential units in the country, scheduled for delivery between 2011 and 2013, are likely to be delayed by up to 18 months. While reducing the number of new launches is a natural reaction from the builders in a slow market, developers also restrict the number of projects in the market by other means. Some builders have recently started inserting restrictive clauses in the sale contracts that prevent buyers from selling the house before a specified time (usually one year of buying). While the

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The Economic Times Wealth, January 16-22, 2012

Cover Story

Waiting for a correction

An online survey by economictimes.com last week found that though buyers have been expecting a correction since property prices are high, most of them have not actually seen prices coming down in their locality.

Do you think property prices will go down in 2012?

12%
Can't say

Would you wait for a correction before you buy a house?

20% No 8% Can't say 72% Yes

NRIs flocking to invest in property

2011 has been a good year for non-resident Indians (NRIs) remitting money to India. With the Indian rupee depreciating by over 20% against the dollar in the past five months, homes are increasingly cheaper in dollar terms. For example: $1,000 sent from the US was valued at `44,800 on 7 June 2011. It is now valued at `52,730. This means a 20% discount straightaway for NRIs without any effort. NRIs are already cashing in on it and are actively trying to invest in the Indian property market. Om Ahuja, managing director, residential services, Jones Lang LaSalle India explains that the depreciating rupee has been one of the major reasons for large developers to hold on to the prices. The depreciating rupee has also caused NRI property purchases to increase in the larger cities, again making it possible for many developers with good projects to hold on to their rates," he says. NRI buyers are responsible for around 5-8% of the total sale in the real estate market in India. The added advantage for NRIs in Europe and the US is that property prices in both these locations are also close to their all-time lows, which means repatriating gains made in India is also a good idea. For those looking at pure investments with a time horizon of at least three years, a property under-construction offers the best deals in the market today. For those with lower budgets, a real estate fund may also be a good option. These funds are similar to mutual funds but are usually closedended. This means that investors can enter only when the fund is launched and must stay locked in for the duration of the fund. The funds have a minimum ticket size of at least `25 lakh. Apart from lower entry price, these funds also offer the benefit of diversifying into various real estate properties and that too, with the help of a professional manager.
GETTYIMAGES

37% 51%
No Yes

A majority expects property prices to go down but a significant number also thinks otherwise.

Only a fifth of the respondents are willing to go ahead and buy at these prices.

Why do you think there may be a correction in prices?

14%
I have read it in the papers

Would lower home loan interest rates be a reason to buy?

40%

74% 12%
Everyone is talking about it Prices are too high

No

52%
Yes

8%
Can't say Affordability is the main reason behind expectations of a correction in prices. Lower home loan rates will bring many buyers into the market as it would improve affordability.

Have developers brought down property prices in your locality?

Have rentals increased in the past one year?

76%
No

17%
Yes

7%
Can't say

Yes 67% No 33%

Rentals have increased despite a slowdown in the property market. Number of respondents: 1,760
ANOOP VERMA

Despite the buzz, the majority has not seen a real correction in the past one year.

builders claim that they are doing this to prevent speculators from buying into the projects, the real reason is that the developer does not want the housing units to be out in the market at a lower price (by the seller) in times of a slowdown. This is primarily to have control over the time period before their property comes back in the market for sale. It would also deter speculators to offer the property at a lower price than what the developer is offering, says Ravi Goenka, advocate at Mumbai-based Goenka Law Associates.

Rising construction costs

Almost all builders will today quote this as one of the main reasons for increasing property prices. Though the impact is often exaggerated and may sometimes look like an excuse, the fact is that the cost of construction and materials has actually gone up in the past one year. With the cost of raw material like cement, steel and other inputs going up by 25%, it is just not possible for developers to reduce the cost, unless the government offers some subsidy, says Niranjan Hiranandani, managing director of

FROM THE SELLER TO THE BUYER

1.
Builder
Cost of construction: `2,500 a sq ft Sells it for: `3,000 a sq ft Margin: 20%

2.
Underwriter
Sells it for: `3,450 a sq ft Margin: 15%

3.
Big brokers
Sells it for: `3,725 a sq ft Margin: 8%

4.
Sub-broker
Sells it for: `3,900 a sq ft Margin: 5%

5.
Buyer
Gets it at: 56% premium over the cost

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The Economic Times Wealth, January 16-22, 2012

Cover Story
Amarnath Banerjee 35, Mumbai
Banerjee, a software engineer, wants to buy a 2BHK flat in Mumbai. He has a budget of around `30-35 lakh. In 2008, some real estate brokers told him that prices are likely to crash by up to 30%. But much to his disappointment, prices have not corrected that much.

Hiranandani Group. The incidence of taxes, among the highest in the world at nearly 30-32%, Hiranandani points out, is also coming in the way of a price reduction.

NO INCREASE IS ALSO CORRECTION

If one takes into account the high inflation in the past one year, no increase in property prices is actually a correction in real terms.

Multiple intermediaries
In many markets in North India, the developer is no longer the one selling his project to the retail buyers. There are underwriters, big brokers, brokers and sub-brokers in the market who have entered the sales flow (see From the seller to the buyer) and who have their own margins to take care of before an apartment reaches the end-user. The intermediaries also affect the resale market. The estate agents are the first point of contact who influence the decision making process of both the buyer and the seller, says Ganesh Vasudevan, vice-president, Indiaproperty.com, a real estate portal.

Builder cartels also at work

While on the one hand builders complain of cement and steel cartels pushing up the construction cost, they have now started operating their own mini cartels in smaller markets. They fix the quoted price as a group in a location. There is usually a pattern in which the developers increase prices around the same time, says the marketing head of a real estate company. Its another matter that the differentiation in price happens in the form of discounts being offered to serious buyers. When 37year-old Vasanta Sobha Turaga from Hyderabad started scouting for a property in the prime location of Banjara Hills, she found it tough to get one in her modest budget of `30 lakh. Though there is virtually no demand in the market, the developers just wont let the prices come down. Many brokers do agree that they hardly manage any business, but the developers work in tandem and just wont agree to sell the property with a price cut, says the conservation architect.

The correction in property prices was only to the tune of 10-15% and that too in select pockets in far-off suburbs. In the city, property prices never actually came down.
BHARAT CHANDA

`5,000
per sq ft

`4,562

per sq ft

(The average All india WPI rate between Jan 2011 and Nov 2011 was 9.59%. The real value of the property worth `5,000 a sq ft would have fallen to `4,562.50 a sq ft in real terms.)

WHY YOU SHOULD NOT BET ON A CORRECTION

eal estate is unlike any other investment in many waysthe entry barrier is high, liquidity is low and reliable market information is rare. It is different from other investments also when it comes to a correction. When it comes to the primary market, builders rarely ever decrease the price. In case of a cash crunch, the first resort is attracting buyers by offering discounts, which varies from buyer to buyer. This means that you cannot point to a new lower base price. If the builder is really short of cash, then instead of reducing the ticket price of his existing project, he launches a new one with different specifications at a lower price point. But this too is not technically a correction since the project and specifications are different. The same holds true in the resale market. Unlike in stocks or mutual funds where you can track prices or NAVs, you do not have access to a reliable valuation of your property on a given day or month.

about getting a good locationboth for the project as well as for your apartment within a housing project. And the fact is that the best locations get sold out first, such as park-facing corner apartments. One of the major reasons for prices holding up in places close to business districts or work places is that consumers do not want to travel long distances for work. People are

willing to pay a high price to stay nearer their workplace. Though there are projects available farther away in the city periphery, the clamour is for the projects closest to the citys business districts. This means that even in a lukewarm market when there are very few buyers, the best locations and projects will be the first ones to be picked up.

Affordability will catch up

As our survey shows, a majority of the buyers would be back in the market if they can afford the EMIs. With interest rates set to go down (a few banks have already brought down their base rates), some of the latent demand will start coming back to the market. Two years of salary hikes and property price stagnation in the past one year has

THE AFFORDABILITY FACTOR

A 15-20% price correction and lower mortgage rates can improve the affordability from the current high levels. This can begin to tap the pent-up demand. However, affordability can also go up due to a rise in incomes. Interest rates have started moving down. If incomes go up, affordability will also rise.

Unit sizes have shrunk

Another tactic that builders are using to maximise their returns is by reducing the size of the units. The standard apartments being sold today are far smaller than the average unit sold a few years ago. The per square feet value remaining constant, what has shrunk is the size of units in places where density norms were eased, such as in Noida, and where FSI restrictions have been rejigged, says Jayashree Kurup, head, digital content and research, Magicbricks, a real estate portal. By building smaller flats the builder not only makes more money since he is selling more units, his expenses on the common facilities also remains the same despite the rise in units. Builders have also begun to increase the margin between the super area (which he quotes while selling) and the carpet area (the usable area that you get).

100%

80%

60%

40%

20%

0% 1998 2000 2002 2004 2006 2008 2010 2011E 2012E

EMI as percentage of monthly net income

Mortgage rates (%)

Best locations get sold out first

Getting a good property is also
Source: HDFC, Credit Suisse estimates

Cover Story
IT'S NOT JUST ABOUT RESIDENTIAL
Most listed Indian property developers derive a significant share of value (in terms of Gross Asset Value contribution) from the office and retail segments as well. Any pick-up in this segment would also increase the developers holding power. 100% Office/ Retail GAV Residential GAV 80% Others

The Economic Times Wealth, January 16-22, 2012

07

60%

40%

20%

0%

DLF

UNITECH

OBEROI

SOBHA

PRESTIGE

Source: Company data, Credit Suisse estimates

already cushioned some of the impact of high prices. This will also result in hardening of prices, especially for projects that are ready or are nearing completion.

Mumbai is a different market

Most of the news about a possible correction in property prices is coming out of Mumbai. But keep in mind that Mumbai is a very different market from the others and what you read about the price trend in the city, whether it is the record high deals or a correction in the market, may not be true for your city. The impact of even something like a global crisis on the real estate market varies from city to city. Take the example of a city like NCR, where you have a mix of salaried individuals and businessmen. Most of these businessmen have not been affected by the global recession, so I dont think it will affect demand in the real estate market, says Shveta Jain, director at Cushman & Wakefield. However, the same may not hold true for an IT city like Bangalore, which largely comprises the salaried class. Even Chennai has a mixed set of salaried and businessmen, so I dont see global factors affecting demand there, adds Jain.

work places, have consistently risen in the past two years. Some locations in the metros have seen residential rentals go up by more than the usual 10% annual hike. So if you are one of those who has been staying on rent waiting for an opportunity to buy, higher rental payouts would mean losing out from one hand what you gain from the discounts on your property.

THE STRATEGY TO FOLLOW

Vasanta Sobha Turaga 37, Hyderabad

Vasanta, a conservation architect, has been eyeing a 1,200 sq ft property in the Banjara hills area of Hyderabad. Though she sees no demand in the area, the property is still priced at `1 crore and she thinks that prices should come down.

Its not all about residential

Builders derive a lot of value from commercial and retail real estate . Any pick up there also increases their holding power for the residential segment. According to recent reports, as the economy starts recovering in the second half of the year and companies start investing the cash they are sitting on, the commercial real estate sector will be among the first to benefit. With the notification of 100% FDI in single-brand retail being announced recently, the retail segment is also likely to see some deals being struck. Since most developers have a mix of both residential and office space/ commercial developments, any pick-up in one segment benefits the other. Despite the fund crunch some developers have managed to raise funds from alternate sources like private equity. Private equity firms pumped $2.68 billion (about `14,000 crore) into real estate firms during 2011, a 69% jump over the previous year. Even if the high cost alternate fund sources are available to builders, they may be willing to stick to offering discounts rather than bringing down ticket prices of their projects.

espite factors in favour of a correction, property prices remained mostly stable in the past one year. So should you still wait for a correction? Most experts are of the opinion that a broad-based correction may never happen. Even if one looks at the most pessimistic view regarding price corrections, it is unlikely to be more than an average of 10% in select pockets in the metro cities.

Developers continue to quote absurd prices. Its like they have nothing to lose. Even if one or two sales materialise in a month, they recover the cost. So they are holding on to the rates.

Window shop
The first thing to keep in mind is that this is a very good market to bargain for discounts. Even if you have decided to wait for some time to see if the prices may actually correct, you should go out in the market and see what is on offer. It is still possible to get an apartment within your budget after the builder throws in some discounts. Chances are that before the market picks up, you may land a property that is either ready-to-move in or nearing completion.

been stuck in a stagnant property market are looking for an exit route, even at lower margins. The advantage for the buyer here is that he is dealing with an individual instead of the builders marketing team. But this also means running around more and approaching more number of brokers to identify the right properties in the market and get the best deal. The resale market also comes with its own challenges of verifying whether the seller holds the title of the property or if the property is legal.

many projects getting delayed or those of smaller developers being taken over.

Dont be in a hurry
Though prices are unlikely to go down, they are also not going to shoot up in a hurry because the impact of factors such as low interest rates and higher salaries comes with a lag in the market. I dont see an upside in real estate prices for the time being. Maybe after three years, we would see an upside. If you stay invested for about 4-5 years, you would see an appreciation. Usually, there is an annual increase of about 8-11% in prices, says Uday Dharamdhikari, CEO, Usha Breco Realty.

Rentals have been going up

This is especially true for the bigger cities where there is a significant chunk of floating population. As buyers continue to be on a wait-andwatch mode, the rental segment of the market has been reaping the benefits. Residential rentals, especially in locations closer to

Avoid new launches for now

Unless you are looking at the established players in the market, it is better to go for a project which has something to show on the ground in terms of actual construction. The cash crunch over the last two years has resulted in

Check out the resale market

Some of the best discounts may be available in the secondary market if you have enough money for a higher down payment. This is because many investors who have

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